A Carbon Tax may Curb the Rise in Natural Gas Flaring

After a few years when the practice was declining, flaring of natural gas is back in the news. (See, for example, Flares take shine off fracking boom in the Financial Timesfor Jan. 27.) Estimates indicate that natural gas flaring accounts for more than 1 percent of all the CO2 that human activity releases into the atmosphere, about as much as the entire country of Spain. The focus of recent attention has been North Dakota, where some 29 percent of all gas that is produced is flared.

Why so much waste of this valuable resource, often touted as the bridge fuel to our clean-energy future, and what can be done about it?

Flaring: The photo

Natural gas flaring is serious problem, but not a new one. What has prompted the FT article and a flurry of similar pieces in newspapers, on blogs, and on television is the appearance of dramatic new photographs of the Earth at night, taken by NASA’s Suomi-NPP satellite. The one below zooms in on a pattern of bright lights in the Baaken hydrocarbon formation in North Dakota. In other versions that zoom out on the same view, the cluster of lights around Williston shows up almost as brightly as Chicago or Minneapolis.

Before discussing flaring directly, a few comments are in order regarding the photos themselves. Although they have been useful in bringing public attention to the problem of flaring, they have sometimes been misinterpreted.

For one thing, although a lot of gas is being flared in the Baaken formation, that is not exactly what the picture shows. The text that accompanies the photo on NASA’s Earth Observatory web site points out that most of the bright specks are lights associated with drilling equipment and temporary housing near drilling sites. Only a few are actually gas flares.

Second, the North Dakota flaring does not come from natural gas wells, but rather, from oil wells. No less an authority than Al Gore seems to be confused on this point. In a CNN interview on February 3, CNN’s Fareed Zakharia asked Gore whether he thought the switch from coal to natural gas, which fracking has made newly abundant, would help to slow the rate of climate change. Gore responded by referring to a NASA picture of gas flaring in North Dakota as evidence that natural gas was not as clean as some people claimed it to be.

Gore was right to point out that we should not ignore emissions that occur during natural gas production when comparing the environmental impact of various energy sources. However, those twinkling lights in North Dakota have nothing to do with fracking for natural gas. There is little if any flaring from natural gas wells, aside from testing and some kinds of emergency conditions. The main concern with gas wells is methane that accidentally leaks into the atmosphere, where its short-term effects on climate change are some 20 times more powerful than an equivalent volume of CO2. In North Dakota, on the other hand, the gas we are worried about comes from oil wells. It is not released accidentally but intentionally. It is flared in order to convert the methane in the raw gas to CO2. That does not make it any less of a waste of energy, but it does reduce the impact on climate change.

The economics of flaring

Two economic factors explain why oil producers sometimes flare associated gas rather than using it or selling it.

One is the high cost of bringing the gas to market. No company would drill a gas well without pipeline access, but oil wells are a different matter. Although an oil well can produce a considerable amount of associated gas, it still constitutes a relatively small share of the total value of the energy produced. It is often worth drilling for the oil alone even if the gas is wasted. In the past, much of the world’s flaring went on in remote locations with limited access to gas pipelines, especially Siberia and the Niger Delta. North Dakota has now joined that group of productive but remote oil fields without adequate access to gas pipelines.

The other factor that enters into the decision to flare is the current low price of gas, brought about by the fracking revolution. Whether it is worth hooking up to the pipeline network over any given distance depends, in turn, on how much the gas is worth. Recently gas prices in the United States have been bumping along near record lows. As a recent report from OilPrice.com puts it, “Natural gas is no longer a good business to be in; there are too many players, too many wells and no ready demand sources to soak up the surplus.” If things have gotten to the point where it isn’t even worth sinking a gas well, it is easy to see how far from economical it can be to market the associated gas from an oil well.

What is being done

It is not as if no one is doing anything about excessive flaring. Since 2002, the World Bank has had a Global Gas Flaring Reduction Partnership, which has attacked the problem on several fronts. By promoting best practices and encouraging the development of markets for associated gas, the partnership has made some headway. Gas flaring worldwide dropped from 172 billion cubic meters in 2005 to 140 billion in 2011, equivalent to taking 52 million cars off the road. The World Bank’s partnership is happy to take at least partial credit for that. However, it appears that flaring is again on the increase, especially in North Dakota.

North Dakota has been making efforts to cut flaring, as well. In principle, state regulations allow a well to flare for no more than a year before it is connected to some kind of gathering system, although permits are sometimes extended. Last year some 1,000 wells were connected, but more than that were drilled, so the amount of flaring increased. In addition to encouraging producers to hook up to the pipeline network, North Dakota uses tax incentives and other carrots to encourage the use of associated gas as a fuel for the generators that power equipment at drilling sites.

How a carbon tax could help

As the World Bank notes, regulation, whether at a global or local level, yields the best results when it is backed by sound pricing for natural gas. The lower the price of delivered gas, the more producers will resist efforts to reduce flaring. The higher the price, the more waste reduction becomes profit-driven, with regulations as a backstop.

Right now in the United States, low gas prices and regulatory attempts to reduce flaring are working at cross purposes. One way to improve the pricing climate would be to implement a comprehensive carbon tax. (The term “carbon tax” is somewhat of a misnomer; a well-designed tax would take into account CO2-equivalent quantities of all greenhouse gasses (GHGs), including methane.) The tax would serve to reduce flaring in three ways:

Oil producers would bear a tax burden based not just on the carbon content of oil itself, but also on the CO2 and other GHGs released during flaring. Any reduction in flaring, whether through use of associated gas on site or connecting to a distribution system, would have immediate tax benefits.

Combustion of natural gas releases about 20 percent less CO2 than fuel oil and about 40 percent less than coal. A carbon tax would therefore encourage fuel switching for uses from electricity generation to transportation. For oil producers, a carbon tax would increase the after-tax value of associated gas relative to that of the oil itself. That would increase the profitability of using rather than flaring the gas.

At the end-user level, a carbon tax would increase the prices of all fossil fuels. That would encourage conservation. More conservation, in turn, would reduce the need to drill for new supplies at today’s breakneck pace. With a more moderate pace of drilling, pipeline hookups would have a better chance of keeping up with the new wells that come into production.

In an ideal world, a carbon tax alone, set at just the right level, would be enough to eliminate flaring in all cases where the resulting environmental harm exceeds the cost of capturing the gas and using it productively. In practice, other forms of regulation would be unlikely to disappear. However, if the economic signals from a carbon tax worked in the same direction as regulations aimed at promoting best practices, the combination would be more effective and would be less strongly resisted by producers than is the case today.